Administering Canadian Low-Interest Loans

Page Name

Definition Name

Usage

Create General Deductions Page

GENL_DED_DATA

(CAN) Assign low-interest loan deductions to an employee and specify the calculation method for the deduction.

See Setting Up Employee General Deductions.

When an organization provides an employee with an interest-free or low-interest loan, the employee receives a taxable benefit equal to the amount of interest that would have been paid for the year at the government-prescribed interest rates, minus the amount of interest that the employee pays in the year, or within 30 days after the end of the year. This benefit has no taxable goods and services tax component.

The value of the taxable benefit changes throughout the year as the prescribed rate (which is set each quarter by the federal government) changes, and as the employee pays down the loan (and/or any interest).

Note: A loan also includes any other indebtedness. For example, if the employer purchases a computer for the employee and the employee proceeds to have payroll deductions for that computer, the company has made a loan for the computer's price less any employee down payments.

Taxable Benefit Calculation Example

Payroll for North America calculates the low-interest loan taxable benefit as follows:

Loan Balance x Prescribed Interest Rate % on Canadian Company Tax table

minus

Loan Balance x Loan Interest Rate % on Create General Deductions page for employee

equals

Annual low-interest loan taxable benefit for the employee

To calculate the actual amount of the taxable benefit on an employee's individual paycheque, the system divides the annual low-interest loan taxable benefit by the number of the employee's pay periods per year.

For example, on January 1, 2004, company VNB lends Joan Avery 10,000 CAD at a rate of 5 percent. The government-prescribed rates for 2004 are:

Quarter

Percent

1st quarter

8%

2nd quarter

7%

3rd quarter

6%

4th quarter

5%

Joan chooses to pay back the loan through payroll deductions at 500 CAD per monthly pay period starting February. The system calculates the monthly low-interest loan taxable benefit as follows:

Pay Period

Loan Balance

Prescribed Interest Percent (Government Rate)

Loan Interest Percent (Company Rate)

Monthly Taxable Benefit

January

10,000 CAD

8%

5%

25 CAD

February

9,500 CAD

8%

5%

23.75 CAD

March

9,000 CAD

8%

5%

22.50 CAD

April

8,500 CAD

7%

5%

14.17 CAD

May

8,000 CAD

7%

5%

13.33 CAD

June

7,500 CAD

7%

5%

12.50 CAD

July

7,000 CAD

6%

5%

5.83 CAD

August

6,500 CAD

6%

5%

5.42 CAD

September

6,000 CAD

6%

5%

5 CAD

October

5,500 CAD

5%

5%

0 CAD

November

5,000 CAD

5%

5%

0 CAD

December

4,500 CAD

5%

5%

0 CAD

Total

127.50 CAD

The total taxable benefit for the year in this example is 127.50 CAD.

Home Purchase or Home Relocation Loan Calculation

The system does not calculate the taxable benefit of low-interest home purchase or home relocation loans. For these types of loans, the prescribed rate in effect at the time the loan is made (not the current quarterly adjusted prescribed rate) should be used to calculate the taxable benefit throughout the loan period, for up to five years. If the prescribed rate is lowered during the five-year period, the lower prescribed rate is used until such time as the rate goes up again. After five years, the prescribed rate at that time is used for the next five years, and so on.

Note: Home purchase or home relocation loan calculation is subject to change depending on legislated requirements.

Before you can specify an employee's loan percentage, you must perform and maintain the following setup steps:

  • Maintain prescribed interest rates and loan data.

  • Activate loan processing.

  • Establish loan deductions.